Update: Q about Dave Ramsey Plan

[niccig]

Update.
I have some success to report. DH and I have agreed on a plan to pay down our adjustable rate HELOC. We ran the numbers and it makes sense to get rid of it and have a lower payment, plus it should give us enough equity to refi. Fingers crossed we can do it before interest rates go up. Part of me hates putting more money into our house, but we're not moving from here for at least 15 years and a lower rate does make a huge difference over that time frame. It'll also help to have a lower payment if DH does get laid off or another pay cut

We're not going all out Dave Ramsey, we will not use up our emergency fund, nor cut back on DH's retirement contributions. We'll keep those as they are. We've sat and agreed on certain areas to cut back. I was surprised by some things DH was willing to give up totally or significantly cut back on. A couple of areas he didn't want to cut back, and while I wanted to go :6: I didn't push it. I did say "how long this takes depends on what we're willing to give up, and it's only for a short period of time", and a couple of hours later he said "Ok, let's cut it to this level..." I also had some areas where I had to be convinced to cut.

I would probably go farther on some of the cuts, but I'll take it.

It's still early and we'll see how this is all implemented. I'm happy to just have some sort of plan.

Thanks everyone for your advice. I'll be back with more questions I'm sure.

_______________________________________



I read the Total Money Makeover yesterday. I'm going to get DH to read it too. We're actually not in too bad shape according to that. No credit card, student loan etc. We have a year on my car and a HELOC. We already have an emergency fund.

I'm going to present to DH we use some of the emergency fund to get rid of my car loan and some of the HELOC and then really work to get rid of the HELOC. I think we can do this in less than 6 months. If DH has work like the last week, it'll be even faster (worked 38 hours in 3 days, poor guy!)

I don't want to get rid of all of the emergency fund because DH's work isn't as stable as we would like, but we could use 1/2-2/3 of it. Then build it back up.

Once you've got rid of all debt except mortgage, when do you start to add back in some expenses you cut? Towards the end, the book did say something about adding back in some small things once past debt snowball. 6 years of never going on vacation is difficult to swallow - especially as then we'll never see family.

I can understand getting rid of a mortgage if it's under $300K, but ours is a lot more than that, thank you SoCal prices. If our HELOC is gone, we can look at refi, and that will save on payments, but to pay it off in 6 years like he said many people do, that sounds a little crazy for those of us with 500K+ mortgages.

I understand why paying it off would be fabulous, as mortgages are about 30% of many peoples income, and that's a lot of money to do other things with.

Thanks.

[echoesofspring]

The biggest part of the debt snowball really is all debt but your mortgage (heloc's would be included in the snowball). I think once you've debt free (minus mortgage), he's fine with you taking vacations, paid for with cash ;) He's definitely someone believes in enjoying life, but doing so responsibly. I think a lot of people pay off their mortgage early b/c once they see momentum in paying off their debt the goal of the mortgage becomes more exciting to them then adding back expenses they been living without.


If you haven't already done so, start listening to his free daily podcast. The question of vacations comes up a lot.

[egoldber]

Have you been to your financial advisor yet? I wouldn't do anything dramatic until you do. I think Dave Ramsey is terrific for people with limited understanding of finances and a great deal of consumer debt who don't really know how to put themselves on a budget. IMO, based on what you write here, you and your DH are none of those things. It sounds like you and DH disagree on how to go about saving and prioritizing savings. DR's expertise is helping people get out of discretionary debt.

DR is very VERY debt averse, but I think many financial experts disagree with him when it comes to income management and investing advice.

ETA: And especially in light of the current financial climate I would be incredibly reluctant to dip into a cash reserve right now.

[niccig]

ETA: And especially in light of the current financial climate I would be incredibly reluctant to dip into a cash reserve right now.

This is true. I was considering this with regard to the HELOC - it's adjustable and if rates go up, the payment will go up. And we couldn't refi last year when rates lower as we didn't have 20% equity. We can get rid of it w/o going into cash reserves if DH will just suck it up and sacrifice for a little bit. We were supposed to pay it off w/i 5 years, we're now in the house 7 years. I just want it gone and kicking ourselves that we missed lower interest rates last year. Rate we were quote would have saved close to $1K a month

I'll get DH to read the book, I'll get us to an adviser - supposed to meet with someone that helped DH with 401K/IRA. If that doesn't go well, I'll set something up with another adviser.

Thanks.

[bubbaray]

And especially in light of the current financial climate I would be incredibly reluctant to dip into a cash reserve right now.

:yeahthat:

Honestly, I would NOT dip into your savings now.

If you do decide to pay off debt with your emergency fund, *I* would start with any debt that is a variable rate. Because I think people with variable rate debt in the US could be screwed in the near future. I'm assuming your car loan is a fixed rate? What rate is it at? If it is at or near the return you are getting on your emergency fund, I would just keep paying off that loan and not even consider paying it off early. If your terms allow, you could bump up your payments.

[niccig]

Thanks for you input. I just spent the morning updating Mint, so we've got an idea of what is going on. We won't rush into any decisions.

DH and I've argued for so long over money, I'm just done and want us to get on same page. He is so optimistic that everything will be fine, and is in denial about writing on the wall for his work. His mentor who is one of the best in DH's field got laid off - he's 55 and begging for work.. That will be DH in 13 years, but he won't commit to preparing for it now. He admires a friend who's in same field and can semi-retire in next couple of years - very savvy with money, investing, real estate. I see 2 options. Be like his mentor and beg for work at 55, or be like his friend who's prepared to semi-retire and teach once he's considered too old for the industry.

[Uno-Mom]

What you describe is exactly what DR would suggest - if the job situation isn't stable, keep the emergency fund. That's where we're at right now, building up savings even though we still have debt.

And he certainly suggests adding the fun things back into the budget after you get the debt gone and emergency saving in place.

Can you refi now? Even if rates aren't as great as they were, they're still going to go higher. I'd do anything to get rid of an adjustible unless I could pay it off ASAP.

I totally agree with the PP who says there are more sophisticated number-crunchers out there. However, for those of us who can do the math and understand those fancier systems ... still, what matters is the behavior change. If DH and I could get past "doing" the math to actually "applying" the math, we wouldn't have had a car loan to pay off (it's now gone) OR all the student loans (20k down, 23k to go - grr)!

[sste]

How many months worth of an emergency fund do you have and how much are you thinking of spending to pay off the debts?

If the car loan is one year off from being paid and fixed interest you have probably paid most of the interest (they frontload that :)) and are now paying mostly principal. So probably not priority 1. I agree with bubbaray about variable debt and I agree with egoldberg about DR. And I think it all depends on the size of your emergency fund. You two probably need a bigger emergency fund than your average couple because right now you are single wage earner, your house is expensive/California, your child is in private school AND you are in school. Those factors influence the amount of the emergency fund one would want which is why I am nervous about you guys spending down too much of yours.

Can you come up with a more moderate plan to pay off the HELOC?

As for budgeting, my grumbling husband and I started our electric orange ING discretionary accounts. We have a pre-existing ING savings linked to our b&m bank and for us it took about 10 minutes to set up each account - - phone them and they will walk you through it from start to finish and set up the monthly draw from an outside account. You need to set up two accounts, one for each of you so your husband will need to be around to talk to them too (they are open weekends). The deal is that you can atm withdraw from seven-elevens and targets and some CVS. Not the world's most convenient but for us we realized we can use the debit card for virtually all of our spending so we probably won't need the ATM feature much. The free debit card is mastercard based and draws from the checking account with no fees- - if you set it up with NO overdraft protection which is what I rec it will simply decline the purchase when there is no more money left in the account. We each set up ours to deposit $225 from our central checking to each of our separate ING accounts on the first of the month. That money will be used for clothing, eating out (not as a family), electronics, amazon, hair/spa/pedicure, amazon purchase, hobbies, cabs, and my favorite category personal f*ck-ups such as tickets and late fees. :)

[niccig]

Can you come up with a more moderate plan to pay off the HELOC?

As for budgeting, my grumbling husband and I started our electric orange ING discretionary accounts.

I hear you all on not spending down the emergency fund. We won't do that. I think I got carried away reading the book. I can see why he suggests that for some people, but I do think what happened last week has made things uncertain.

I think a more moderate plan for the HELOC is in order. As our personal spending accounts, without overdraft, so once it's gone, it is GONE. I'll push for us getting these set up within a budget. I'm also going to need to budget groceries and eating out as a family - I think the envelope system will work for these.

We'll still go see someone, but I'll put the above as my priorities.

[erosenst]

Have you been to your financial advisor yet? I wouldn't do anything dramatic until you do. I think Dave Ramsey is terrific for people with limited understanding of finances and a great deal of consumer debt who don't really know how to put themselves on a budget. IMO, based on what you write here, you and your DH are none of those things. It sounds like you and DH disagree on how to go about saving and prioritizing savings. DR's expertise is helping people get out of discretionary debt.

DR is very VERY debt averse, but I think many financial experts disagree with him when it comes to income management and investing advice.

ETA: And especially in light of the current financial climate I would be incredibly reluctant to dip into a cash reserve right now.

I agree. I know a number of people who have followed DR to the letter...and made some decisions many/most who really understand finances would *never* advocate. (And I'm one of those people who uses 'never' pretty rarely.)

Having said that, I do think his program has helped a lot of people get out of the credit card debt cycle, which is a very good thing.

[KrisM]

I do not follow DR, but haven't ever needed to. I have listened to his show on the radio, but not read the book. But, I would pay off a car loan, even if you're mostly paying principle now. Not having consumer debt is a really nice thing. Depending on how much the HELOC is and how much you have in savings, I might pay that down. But, using the car loan money towards the HELOC should help a lot.

How many months is your e-fund? Does it include all expenses or just 'necessities'? If you used a chunk to pay off the car and some of the HELOC, how long would it take you to get to 6 months of expenses again?

We only have a mortgage as debt. We have 4-5 months of full expenses and over 6 of cut down expenses saved in a designated e-fund account. We have other savings accounts for things like vacations, home improvements, car replacement, etc. Actually, it's 1 account and I manage the portions in Excel. So we save towards those things monthly. I know what we need for a vacation and save 1/12th of that monthly. Car and House are more random, since nothing particular is going on for either of those. But, it helps me to really look at the rest of the budget to see where I can limit things to increase our savings numbers :). And when I look at how much more we'll save when we don't have the mortgage payment, I get pretty excited to pay that off! That is why I'd pay off a car - to use those payments for better things :).

[bubbaray]

But, if the car loan is fixed, it makes no sense to pay that off first as opposed to paying off the variable rate debt. It is likely that the variable rate debt will cost more in the short term, therefore the focus should be paying that off or down asap.

[egoldber]

You two probably need a bigger emergency fund than your average couple because right now you are single wage earner, your house is expensive/California, your child is in private school AND you are in school.

I agree with sste. I don't know what your current emergency fund is, but in your situation, given these facts, I would want a year fund. I know many people think this is excessive, but when you are in a niche industry where jobs are tied to location, this is soooo important.

And I agree about the car loan. At this point, with one year to go, you are paying all principal and there is no real incentive to pay it off early.

I would look at accelerating payments on the HELOC assuming you can do that vs. a large chunk payout. Even a small amount more per month or an extra additional payment per year could greatly decrease your repayment timeframe.

I think it is important to emphasize with your DH that the next 2-5 years need to be more austere while you finish school, pay off the car and pay down the HELOC. But once those things are done, you can start to add back in more of the fun stuff. :)

[KrisM]

But, if the car loan is fixed, it makes no sense to pay that off first as opposed to paying off the variable rate debt. It is likely that the variable rate debt will cost more in the short term, therefore the focus should be paying that off or down asap.

I missed that part of her posts that one was variable. Yeah, looking at interest makes a lot of sense, but DR is about the quick payoffs and says to do the lowest amount first, regardless of interest rates. Not everyone agrees, but he says the quick win on paying something off is good motivation.

[KrisM]

Another thing to consider is that if you pay off debts, your monthly expenses are lower and the e-fund amount can be lower. Example:

Monthly expenses including car debt: $5000
Car payment $500
E-fund for 6 months: $30,000

If you have 1 year left on the car, that's $6000. And you have-
Monthly expenses: $4500
e-fund remaining: $24,000, which is 5.3 months
e-fund for 6 months: $27,000
Use the $500 car payment to rebuild to that in 6 months.


As for needing more e-fund just because you have an expensive CA house and private school, that isn't quite right. I'd go to the upper end because of a job stability issue, or single income, etc. But, the rest is built into the calculation. Just because you do private school shouldn't mean you should have 2 years instead of 6 months expenses saved. There isn't a one-sized number that fits for everyone. Someone might have $30,000 for their e-fund and that might be 8 months of expenses. Someone else might have $40,000 and that's only 3 months. You have to look at your actual expenses and decide how many months you want and do the math. Sure, you mgiht want more months because of the job etc, but the school tuition, house payment, etc is built into the calculations already. Lowering your obligations (car payments, HELOC) lower your requirements or stretch your e-fund. If your DH loses his job, wouldn't it be nice to only have to worry about the house, food, lights, etc and not also about the car payment, HELOC, and other debts?

[egoldber]

I think the concern is more that the HELOC is variable and the payments may go up soon if interest rates swing high. So the overall total payout will be much higher. So allocating some of savings to paying down the principal on the HELOC may make more sense long term than paying off the car loan early.

But this is why I think they need to consult a financial advisor vs. relying on someone like DR for planning advice. I think he is phenomenal for helping people who for various reasons struggle with spending more than they earn and are in debt. I don't think the OP is in that situation. They can meet their debt but are struggling with how to best allocate their money to savings and investments vs. paying off existing debt.

OP, make sure you talk to the planner about the "forced" early retirement issue. I think this is huge and your DH needs to hear this from a professional. His friend who invested years ago (and likely bought a house years ago) is not a good role model for what he needs to do now!

[KrisM]

I think the concern is more that the HELOC is variable and the payments may go up soon if interest rates swing high. So the overall total payout will be much higher. So allocating some of savings to paying down the principal on the HELOC may make more sense long term than paying off the car loan early.

But this is why I think they need to consult a financial advisor vs. relying on someone like DR for planning advice. I think he is phenomenal for helping people who for various reasons struggle with spending more than they earn and are in debt. I don't think the OP is in that situation. They can meet their debt but are struggling with how to best allocate their money to savings and investments vs. paying off existing debt.

OP, make sure you talk to the planner about the "forced" early retirement issue. I think this is huge and your DH needs to hear this from a professional. His friend who invested years ago (and likely bought a house years ago) is not a good role model for what he needs to do now!

Yeah, that was just an example. Any debt, car, HELOC, etc being paid off will lower your expenses. I don't know anything about how HELOCs work and didn't know they were variable and higher interest rates.

I think seeing a financial planner is a great idea. If they can get on the same page financially, it doesn't really matter what plan they're doing, so long as they're doing it together with the same goals.

[kijip]

Haven't you been to financial planners in the past with your husband not really getting into it and sticking to his pricey hobbies and not really getting into spending cuts? I am not a huge fan of Dave Ramsey but more than anything your husband needs something that motivates him to get behind this, and if DR is what gets through, I think that is fine. Paying off the heloc seems like a wise idea, as does keeping the cash you have because of the field your husband works in.

[niccig]

Thanks all for discussing this through. We haven't made any decisions as we haven't talked. Dh hasn't been home long enough to talk and when he is, his brain is fried. We made an appt with each other to talk about budget this weekend.

We've never seen a financial planner except for someone DH saw about his 401K. We do disagree on what we should do with our money, basically we have no plan and I want a plan. Dh has never had a plan, so there is some resistance. I've got everything in Mint, so I'll call and set up a time with a planner.

I know we can't copy DH's friend who's been investing for years, but I'm holding him up as an example of someone who foregoes some things now to have so much more later on. He was driving reliable boring cars and DH and his friends were leasing more flashy cars. DH admires this guy for being so $$ smart, but doesn't want to give things up. And I need to find a way to convince him of that. I don't know if Dave Ramsey is the way, I also like Elizabeth Warren's 50-30-20. I do think the first step is any budget, and I like the idea of after fixed, DH and I get an amount that is for all our things. I do think that will help a lot. DH does work crazy hours, at the moment it's 16 hours a day in front of the computer, so when he's done with a project he does want to do something fun. Having his own money to control can stop that blowing our budget.

The early retirement is the reason I'm back in school so when it happens, I'll have been working for a while and my income is for savings only. We did discuss this last night, and the people who got to 55-57 and were considered old, didn't have the other spouse working. DH also said that the husband can still get work, but the income is less, and because of housing/college/other they're struggling with that. DH says he will be working at something. I'm not so sure what the industry will look like in 13 years. It's changing so much.

Thanks for listening to me. It helps to get it out and to hear your advice.

[elektra]

Nicci- my situation is different in terms of jobs, school, debt and emergency savings, but I think it is very similar when it comes to DH's as we have discussed before.
I could have done my mint tracking, read the books, done Dave Ramsey until I was blue in the face, but DH would have never been on board. People may not understand that but it's just our reality. It took a planner to get DH's attitude to change.
And we no longer have to have the argument where DH doubts my logic or knowledge (I admittedly am no expert on financial matters!). We now both agree that the plan is valid, we just have to work on actually doing it.
It is going to take us awhile to get our savings where it should be. But that is all taking care of itself now, based on the recommendations our planner set out for us. It's all on auto transfer and we don't even think about it. It's the weekly/monthly cash management that is a challenge for us still.
The planner actually didn't deliver some magical formula. It was a bit underwhelming actually. However, it was a validation of what we needed to save and a bunch of other things, AND it was a way to get DH to commit to the longer term goals.

[niccig]

And we no longer have to have the argument where DH doubts my logic or knowledge (I admittedly am no expert on financial matters!). We now both agree that the plan is valid, we just have to work on actually doing it.
It is going to take us awhile to get our savings where it should be. But that is all taking care of itself now, based on the recommendations our planner set out for us. It's all on auto transfer and we don't even think about it. It's the weekly/monthly cash management that is a challenge for us still.
The planner actually didn't deliver some magical formula. It was a bit underwhelming actually. However, it was a validation of what we needed to save and a bunch of other things, AND it was a way to get DH to commit to the longer term goals.

Elektra, this is what I'm hoping for. Someone else that DH can debate with and they know way more finances than us and can tell DH his reasoning doesn't work. You said the other day it wasn't a magic cure all, and I won't expect that. I just want to come out with a plan. Like you, I think the weekly/monthly management will be more difficult. I know my DH's love language is gifts. I do find it difficult to understand, as I'm not that way at all.

I still want DH to read Dave Ramsey, there was some good parts on how it's your behaviour you have to change. I mentioned somethings to DH and his response is "well their mortgage is less, so they could pay more in other debt" and I would point out "their income is x times less and they paid more off than we did last year."

I know it's all about choices. If we go with our own accounts for the blow money, I know I won't spend all of mine. I'll save some of it to offset my college expenses. But I have an easier time of living on less - and I know that's due to periods of no money when I was a kid. DH has never had that.

[Uno-Mom]

I use DR's show for "white noise" when I'm home alone working, so I've heard his response to situations like yours' many times.

For what it's worth, he'd say: forget focusing on DR ... the only thing that matters is getting on the same page as your partner. If that's DR's stuff, cool. If his stuff doesn't suit your DH, DR would say go elsewhere. Just get on the same page.

('course he'd always argue that his approach is the best, but I've heard him often say to prioritize teamwork and marriage over choosing a particular financial school of thought.)

[niccig]

Update in post 1

[Uno-Mom]

Re UPDATE: that's amazing. Nicely done!

[Melanie]

Nice! We're still making our way through the system, and it's been great. A little painful, but not as much as being in the red or building debt. I keep saying that I wish we'd have done this years ago as we'd have alot more money now!

[niccig]

I keep saying that I wish we'd have done this years ago as we'd have alot more money now!

I totally agree. And I'm kicking myself now. In running the numbers, I think we can get rid of the HELOC in 12-18 months!! DH gets overtime, so depending on how much he works will determine how quickly. We've had it for 6.5 years and it's only half paid off. OMG, how STUPID are we.

[KrisM]

I totally agree. And I'm kicking myself now. In running the numbers, I think we can get rid of the HELOC in 12-18 months!! DH gets overtime, so depending on how much he works will determine how quickly. We've had it for 6.5 years and it's only half paid off. OMG, how STUPID are we.

Yay! :cheerleader1:

We've never had any debt other than a mortgage and that is pretty low too. But, earlier this year, I actually made a written budget and started using cash. Mostly, I wanted to show the kids that it takes actual money to buy things. But, I feel like we got a raise! We have much more going into savings each month than we did before and I wish we had done this years ago. Just being more disiplined is awesome.

[niccig]

Yay! :cheerleader1:
Just being more disiplined is awesome.

I'm already feeling that way after one grocery trip where I didn't go "WOW" at the bill.

I'm out of cell phone contract and will swap to a prepaid plan. I think I can do $15 a month as I don't use a lot of minutes. If that's not enough, I'll swap to $30 a month, but still WAY less then currently paying and I'm not going to notice the difference - same phone, same provider.